A developer alleged that the city didn't live up to its contractual obligations.
The city thought it would be a good place for a new headquarters for something called "Perfect Game Incorporated." The usual plans ensued, including agreements between the city, a non-profit redevelopment facilitator, and Preston Hollow, a "finance company that funds economic development projects for municipal governments and development corporations." These agreements dealt with loans by Preston to the city and the facilitator; the loans were used by the facilitator to purchase two parcels in the city for the project, with some of the money remaining in escrow subject to disbursement when certain things happened.
That's when things allegedly went awry. As the Fifth Circuit put it, "trouble ensued." Preston claimed that the facilitator insisted on disbursement, even tough it has not yet complied with the conditions. Preston sent a notice of default, and requested that the escrow company return the funds. Denials by the city and the facilitator, and back-and-forth claims and denials. Next up, federal court 1983 lawsuit.
For a taking.
The district court dismissed for failure to state a claim. In Preston Hollow Capital, LLC v. Cottonwood Dev. Corp., No. 21-50389 (Jan. 14, 2022), the U.S. Court of Appeals for the Fifth Circuit agreed with the district court and affirmed the dismissal. Even if everything the complaint alleged was true, that does not equal a taking. The city and the facilitator were acting in their "contractual or proprietary capacity," and "[w]e decline this invitation to constitutionalize what amounts to nothing more than a contract dispute." Slip op. at 1.
The court rejected the plaintiff's main argument, that Knick changed the substantive ground rules and rejected the notion that section 1983 does not mean that all state law tort or contract actions are takings. Slip op. at 5. No, the Fifth Circuit concluded, "Knick concerns when a takings claim becomes ripe as a procedural matter -- not what constitutes a 'taking' as a substantive matter." Slip op. at 5.
Preston countered by pointing out that its contractual rights are property, and that such property is protected from uncompensated takings. Here, it argued, the money it disbursed is property (correct there), and that this property was taken when the city and the facilitator kept it. Ah, the Fifth Circuit responded, there's the rub: by what authority did the city get it, and by what authority was it allegedly (wrongfully) keeping it? That's right, the contract. "But Preston Hollow exchanged that 'pre-existing title' for various rights laid out in the Loan Agreement[,] ... so Preston Hollow cannot seriously claim that 'the right at issue is not governed by the terms of the parties' contract.'" Slip op, at 6 (citation omitted).
But we kind of guessed why the takings path was chosen here - no viable claim against the city for breach of contract under state law. Tough cookies, the Fifth Circuit concluded. Sovereign capacity is sovereign capacity, and here, when it allegedly wrongfully broke the deal with Preston, the city was employing the same authority that ever other contractual dealbreaker employs -- its private capacity power, not its governmental power:
But even if it were true that there were no contractual or other claims under state law that Preston Hollow might have pursued against Defendants—an issue on which we of course express no position here—that does not change the fact that a government must be acting in its sovereign capacity to effect a taking.
Slip op. at 6.
Preston Hollow Capital, LLC v. Cottonwood Dev. Corp., No. 21-50389 (5th Cir. Jan. 14, 2022)
